Skip to main content

What is Economic Value Added (EVA) and Market Value Added (MVA) ?


Economic Value Added (EVA): It measures the economic profit of a company. It helps to determine the excess money earned after deducting the capital invested in a company. If economic value added is positive it shows increase in shareholders wealth and vice versa.

Formula:
EVA = Net operating income after tax – (weighted average cost of capital * total capital employed)
Weighted average cost of capital = Cost of equity + Cost of debt after tax

Market Value Added (MVA): It measures the external value or market value of a company. If MVA is positive more investors are attracted to invest in a company. If market value added is negative the existing investors earns less return and company losses interest of a investors towards company stocks.

Formula:
MVA = V – K
OR
MVA = (Outstanding shares*price per share + outstanding preferred share*price per preferred share) – book value

Where,
V = market value of a company
K = capital invested

Advantages of Economic Value Added:
·         It helps to determine the department or area which is not working properly.
·         It helps to measure the goodwill of a company.
·         It acts as a tool which helps in taking a decision.
·         It also measures the efficiency of a manager that how efficiently they utilise the existing assets besides buying a new one.

Disadvantages of Economic Value Added:
·         It does not forecast future cash flows.
·         It is calculated on the basis of current earnings of a company.
·         It is difficult to calculate.

Advantages of Market Value Added:
·         It acts as a tool which measures the market value of a company.
·         It is useful when the stocks of a company traded in stock exchange.
·         It shows the company is able or not to survive in the competitive market.

Disadvantages of MVA:
·         It is not useful when the stocks of a company traded in over the counter.

Example: Find out the economic value added with the help of following information:

Particulars
Amount (in Rs.)
Operating income
5, 00,000
Weighted average cost of capital
6.6%
Capital invested
3, 40,000
Tax
30%

Solution:
Net profit after tax = 5, 00,000 – 1, 50,000 = Rs. 3, 50,000
Economic Value Added = Net operating income after tax – (weighted average cost of capital * total capital employed)
= 3, 50,000 – (3, 40,000*0.066)
= 3, 50,000 – 22, 440
= 3, 27,560
The positive EVA shows the company is able to cover its cost of financing the project and the project increase the shareholders wealth.

Example: Suppose Company invested Rs. 8, 70,000 in a project. The current year sales are Rs. 10, 00,000 and cost of goods sold is Rs. 2, 60,000. The administrative expenses and selling & distribution expenses related to sales are Rs. 1, 80, 000 and Rs. 3, 10,000 respectively. The interest received of  Rs. 10, 000. The weighted average cost of capital is 7.2%. Company paid 30% tax on income. Find out the EVA.

Solution:
Particulars
Amount
Sales
10, 00,000
Less: Cost of goods sold
2, 60,000
Gross profit
7, 40,000
Less: Operating expenses

Administrative expenses
1, 80,000
Selling & distribution expenses
3, 10,000
Operating income
2, 50,000
Less: non- operating income
10,000
Net operating income
2, 40,000
Less: tax
72,000
Net operating income after tax
1, 68,000

EVA = Net operating income after tax – (weighted average cost of capital * total capital employed)
= 1, 68,000 – (0.072 * 8, 70,000)
= 1, 68,000 – 62, 640
=Rs.  1, 05,360

Example: Find out the Market Value Added with the help of following information:

Particulars
Amount (in Rs.)
Market value
6, 60,000
Capital invested
6, 00,000

Solution:
MVA = V – K
= 6, 60,000 – 6, 00,000
= Rs. 60,000
The positive MVA increases the goodwill of a company and attracts more investors.

Example: Find out the MVA from the given information:

Particulars
Amount
Outstanding shares
50, 000
Price per share
10
Book value
Rs. 6, 00,000

Solution:
MVA = (Outstanding shares*price per share + outstanding preferred share*price per preferred share) – book value
= (50, 000*10) - 6, 00,000
= 5, 00,000 – 6, 00,000
=Rs. - 1, 00,000


Comments

  1. Sarah KhanMay 10, 2021 6:33 pm

    thanks for this. It really helped me :)

    ReplyDelete
    Replies
    1. Jyoti YadavMay 12, 2021 3:05 pm

      Happy to help you Sarah Khan and thanks for your comment.

      Delete

Post a Comment

Popular posts from this blog

How to calculate Cost of Preference Share Capital?

Cost of Preference Share Capital:  An amount paid by company as dividend to preference shareholder is known as Cost of Preference Share Capital. Preference share is a small unit of a company’s capital which bears fixed rate of dividend and holder of it gets dividend when company earn profit. Dividend payable is not a tax deductible amount. So, there is no tax adjustments required for comparing with cost of debt. Formula for Cost of Preference Share: Irredeemable Preference Share Redeemable Preference Share K p  = Dp/NP K p  = D p +((RV-NP)/n )/ (RV+NP)/2 Where, K p  = Cost of Preference Share D p  = Dividend on preference share NP = Net proceeds from issue of preference share (Issue price – Flotation cost) RV = Redemption Value N = Period of preference share Example:  A company issues 20,000 irredeemable preference share at 8% whose face value is Rs.50 each at 4% discount. Find out the Cost of ...
88 comments
Read more

What is the difference between Cheque book and Pass book?

 Cheque book is issued by bank in customers / account holder request. With the help of this book account holder can withdraw cash from his/her account. Bank does not charge any fee to issued cheque book to its customer. But afterward bank charges some amount for using bank facility like cheque book, Debit card etc.So, Automatic some definite amount deducted from customer bank account. Pass book is  also issued by bank to its customer. It helps to record all the bank related activity according to date that is withdrawal and deposit. It is recorded by bank but the book is kept by customer to know the current balance of  his /her account.  Point of difference Pass book Cheque book What is the meaning of pass book and cheque book? Passbook is a book in which all withdrawal and deposit against customer account is recorded.   Cheque book is a book of cheques which are used to withdrawal the money to b...
Post a Comment
Read more

Numericals with solutions of Net income Approach

Net income approach questions and answers:   Questions:  Find out the value of the firm with the help of given information: Particulars Amount Earnings before interest and tax 3, 50, 000 Cost of equity 10% Cost of debt 7.2% Debenture 1,00,000 Find out the overall cost of capital with the help of net income approach. (Assume tax rate-10%) Solution: Particulars Amount Earnings before interest and tax 3, 50, 000 Less: Interest @7.2% 7, 200 Earnings before tax 3, 42, 800 Less: Tax@10% 34, 280 Net income 3, 08, 520 Cost of equity 10% Market value of equity (S =net income/ cost of equity) 30, 85, 200 Market value of debt (B) 1, 00, 000 Value of the firm (S+B) 31, 85, 200 Questions:  Find out the overall cost of capital if the equity capitalisation rate is 12...
Post a Comment
Read more